As markets ebb and flow— sometimes quite dramatically— growth seems hard to hang on to. What the animal spirits of the economy first confer, they later withdraw.

But despite frequent market reversals, some companies seem to keep growing and growing assets. Their secrets: focused management, an eye on the balance sheet and retained earnings for reinvestment or dividends. They don’t change even as the tides of investor sentiment do.

Over the past decade, the North Growth U.S. Equity Fund has produced a 5.12% annual return, topping all Canadian equity funds invested in U.S. stocks. No index tracker here: the beta is 0.79. Indeed, the fund is an all-cap, all-sector, go-anywhere fund.

But, as manager Rory North points out, that record extends beyond 10 years, going way, way back. The fund was spun out of Phillips Hager and North in 1992, and then-manager Rudy North had managed U.S. equities since the 1970s.

Although the fund’s management has changed over 40 years—going from Rudy to Rory—the philosophy behind it has remained essentially the same, just becoming a bit more systematic.

“At the end of the day,” Rory North says, the root of North Growth’s success is “adherence to our core growth at a reasonable price philosophy. I know that sounds like a canned answer but it’s what we have.”

Watching and waiting
GARP can lead to different decisions at different times, as seen in the two great bear markets of the 2000s. Investors seem prepared to pay outsize premiums—what North calls moonshots — when times are exuberant. But when faced with a liquidity crunch, they flock to the exits, regardless of the fundamentals. Or because of a lack of discipline.

“We were able to largely sidestep the first blow-up of the last decade because of that, because the market was incredibly expensive,” he recalls. “Good long-term companies, really good companies with good earnings fundamentals and cash flow on the balance sheet and all the stuff we look at were trading at incredibly high valuations. You had Walmart at 40 times earnings, you had all the large-cap pharma up in the 40-times-earnings-type thing. You had the likes of Cisco trading at 125 times earnings … and we just could not spend the money.”

North didn’t buy. But he watched. “We recognized a lot of these companies as being truly great companies, but that doesn’t make them a great investment unless they’re trading at a reasonable price.”

Instead, he went to 40% cash, trimming names that then proceeded to go up another 50% before the Nasdaq crash. That cash holding caused some retrospective criticism, since the stocks North did hold did quite well in 2000-2001.

In a turn of the tide, the tech names that were so expensive then now make up 50% of the North Growth portfolio.

Revisiting value
North Growth took the opposite approach to the 2007-2008 market turmoil. “I don’t have a magic buzzword line,” North says. “I can’t give you your bullet point that says this is what makes it work— other than saying that it’s strict adherence to discipline. What that translated to in the latest market rout that we had in 2008 was us being fully invested throughout that downturn.”

The fund went down more than the market. But North points out that “a lot of U.S. equities, and most specifically the equities that we own within our portfolio, were very attractively valued at their 2007 peaks. As the market started to melt down in the liquidity crisis, these companies weren’t subject to an internal liquidity crisis, they had incredibly strong liquidity positions, incredibly strong balance sheets and strong cash flow generation and the ability to continue to invest in long-term growth.”

That isn’t to say that North Growth is necessarily a buy-and-hold investor. When positions get overvalued, they get sold. But often they make their way back into the portfolio again.

“It’s always nice to get ahead when [a stock] captures people’s imagination and every one starts trading it at a premium valuation and you bought it at a low valuation,” North says. “But the best risk-return scenario from our perspective is a company that is sitting at a very attractive valuation and they deliver the goods on the earnings front and it’s the growth in the earnings that provides the growth in that equity,” he adds. “So yes, we’ll own a stock forever if it stays within the appropriate parameters.”

At the same time,”there [are] stocks that have a tendency to move from premium to discount valuation over time for various reasons. We have stocks that we have been in and out of with long hold periods and long periods where we’re out of them. We might be in a stock for five years and out of it for five years and then back into it.”

He cites a couple of stocks that had premium valuations. That, coupled with management decisions that seemed to show a lack of focus caused North Growth to sell—only to buy back after a management turnaround, some years later. They are now major parts of the portfolio.

Varied concentration
It’s a concentrated portfolio. North runs 30 to 50 names, and it’s currently at 30. “When we’re very worried and things don’t fit our parameters, you’ll see us become less concentrated and potentially raise cash. And when we have a greater degree of conviction on the market and the opportunities that are there, our portfolios become more concentrated.”

But the touchstone is always growth at a reasonable price. “It’s hard to stick to a philosophy when it’s truly out of favour,” admits North. “There’s no rocket science about it. It’s just old school discipline essentially investing for the long term, buying companies not for what they’re going to do tomorrow but what we think their long-term prospects are like and buying and being willing to step in when the market sentiment isn’t there.”


Originally published on